Opinion

Income-led growth’s irony

Sept 13,2018

Kim Byung-yeon The author is an economics professor at Seoul National University.

Economic growth powered by government-engineered increases in incomes should be an issue beyond ideology and politics as it involves fundamentals of a human life — labor and the means of living. If it goes wrong, the life of an individual and his or her dependants as well as the joy of working can be ruined. One could lose their will to earn a living instead of relying on welfare. Imagine the despair of a breadwinner losing the means to support his family and school his children during a non-crisis time because of a failure of government policy. The Moon Jae-in administration must stop its core economic policy immediately if it is destroying jobs instead of creating them.

One piece of data after another tells us the income-led growth policy is wrong for the Korean economy. The minimum wage went up by double digits and a lot of government money was spent, but jobs have disappeared and income distribution has worsened. The result was foreseeable by anyone who studied economics. The theory is that increases in people’s incomes expand their spending and encourage companies to boost output and investment. But there is a major catch. Businesspeople must have confidence in the robustness of consumption to make investments.

Companies will invest and increase their output on the firm belief that demand is continuing to grow. Since investments are both costly and risky, they won’t invest if they are unsure about the demand. They won’t add to their permanent payrolls for the same reason. A higher wage base can discourage hiring. Artificial inflation of demand through government spending cannot last. Companies will exhaust their inventories and release cheap imports instead of making long-term investment or creating new jobs. This is why Moon’s policy cannot be expected to generate the desired effect no matter how long we wait.

The damage from the income-led growth policy has been huge. The services sector, where most self-employed people are to be found, was the first to be devastated. Output in manufacturing was also hit. If the government runs out of fiscal ammunition, we may see an economic disaster entirely of the government’s making.

Income-led growth also contradicts the “inclusive growth” slogan the government has recently taken up. The government has packaged all its economic slogans — income-led growth, innovation-led growth and a fair economy — under the “inclusive” label. But income-led growth can hamper innovation and fairness in the economy. Innovation breeds in a horizontal culture and an atmosphere of freedom. But the ethos behind the income-led growth policy resembles the top-down and government-led growth of the Park Chung Hee industrialization era in the 1960s and ‘70s. The only difference is the change in drivers from the chaebol to unions. The thought that sustainable growth is possible through state-led increases in incomes is out of tune with today’s market-led economy. It would be more up-to-date to change the focus from incomes to welfare if the government wants to stay true to the inclusive concept.

Income-led growth cannot be fair either. In 2016, workers who were paid the minimum wage or below accounted for 13.6 percent of total working population. Senior citizens, working women, and workers with low levels of education make up the bulk of this class. Ironically, the poorer group is excluded from the benefits of a higher minimum wage. The government’s spending of more than 3 trillion won ($2.7 billion) each year to subsidize small-scale employers for the increase in their labor costs should have gone to the poorest class. It is not fair for money that should have been reserved for the needy and income-less people to end up in the pockets of the much more affluent.

State-led increases in incomes are more suitable in extremely underdeveloped economies like North Korea. And yet the media in North Korea has ridiculed South Korea’s income-led growth agenda and called it ludicrous. Instead, it claimed that growth was only possible through inter-Korean cooperation. In underdeveloped countries, higher wages can motivate workers and encourage productivity. North Korea can make the theory a success if its budget for nuclear and missile program is spent on the people.

Ironically, Pyongyang — which is seriously in need of income-led growth — discredits the whole idea, while Seoul obsessively pursues a growth model intended for the underdeveloped world. The poorest in South Korea — and people in North Korea as well — will suffer due to their governments’ misguided policy. Politics defying the 250-year-old science of economics are wrecking the two Koreas on either side of the border.